The mortgage approval process can be confusing and time-consuming, but understanding what factors lenders evaluate can make the process smoother for both the applicant and the lender.
This article identifies the key elements lenders evaluate when considering whether to approve a mortgage application and provides applicants with suggestions for improving their chances of being approved.
Factor # 1: Your Credit Score & Your Credit Report
Your credit score is the number one factor in determining whether you’ll get a mortgage. Lenders use your credit score to determine your likelihood of repaying your loan responsibly.
Some other things to think about:
- Credit Score Range: The higher your credit score, the easier it is to get approved for a mortgage and the lower the interest rate on your mortgage.
- Credit Report: When you apply for a mortgage, your lender will review your credit history to look for any negative entries, such as missed payments or bankruptcy.
- Debt-to-Income Ratio: When you apply for a mortgage, your lender will calculate your debt-to-income ratio to determine if you’re taking on too much debt compared to your income. The more debt you take on, the greater your risk of defaulting on your loan.
Having a high credit score and low debt-to-income ratio are crucial to getting approved for a mortgage.
Factor # 2: Your Job Stability and Income
When approving a mortgage, lenders want to know that you have a steady source of income so they can be confident that you’ll be able to make your monthly mortgage payments.
Here are some things to think about:
- Your employment history: A long-term job history (usually at least two years) demonstrates that you have a stable income.
- Income verification: Your lender will request documentation from you to verify your income, usually through pay stubs, tax returns, or bank statements.
- Self-Employed Individuals: As a self-employed individual, you’ll need to document your business’s success by providing your lender with documentation such as business tax returns and profit-and-loss statements.
- Steady income and job stability: Lenders view you as less of a risk when you demonstrate that you have a steady income and stable job.
Factor # 3: The Amount of Money You Can Put Down on a Home (Down Payment)
Another element that lenders weigh heavily is the amount of money you can put toward a down payment on your new home. A bigger down payment puts less risk on the lender because it shows you have “skin in the game” and are invested in paying off the mortgage.
Here are some additional things to think about regarding the down payment:
- Standard Down Payments: Most conventional mortgages demand that borrowers invest at least 20% of the home’s price toward the down payment; however, many government-backed mortgages allow for down payments as small as 3%.
- Down Payment and Interest Rates: Generally speaking, a larger down payment means you may qualify for lower interest rates on your mortgage and potentially lower mortgage insurance premiums.
- Cash Reserves: In addition to requiring a down payment, lenders would like to see that you have sufficient savings to fund any unexpected emergency situations or unanticipated expenditures.
By making a sizeable down payment and having plenty of cash reserves, you can significantly boost your chances of getting approved for a mortgage.
Factor # 4: The Value and Condition of the Property
The value and state of the property you want to buy will also affect whether or not you can obtain a mortgage. Lenders want to ensure the home is worth the sum you borrow.
Here are some additional considerations:
- Property Appraisal: Your lender requires a property appraisal to establish the market value of your new home.
- Condition of the Home: Depending on the type of loan you pursue, homes that require major repairs may not qualify for those types of loans, e.g., FHA loans.
The value and condition of the property you wish to buy directly affects your eligibility for a mortgage.
Summary
Approval for a mortgage is dependent on four main factors: credit score, income stability, down payment, and property condition. Applicants who understand these elements and plan accordingly can enhance their chances of approval and receive advantageous conditions. Preparing financially for a mortgage includes maintaining a good credit rating, saving for a down payment, and demonstrating income stability to enable a smooth mortgage application experience.
